It happened. The Dow Jones Industrial Average, after riding high, had its first down January in four years. As the news spread, investors began to worry. And by investors, I mean you, me and anyone else with a 401K or retirement plan.
It wasn’t so long ago that hard-working folks watched their retirement savings take a big hit. So any drop, especially one that is so big and happens so quickly, is going to bring back some bad memories.
“People are permanently scarred. We still have pain from the head-on collision that happened in 2007 and 2008,” says Wes Moss, a financial adviser who writes about these very topics for the Bargain Hunter blog. But while every correction may bring a new set of fears, it is important to remember that it is just that — a correction.
“We are all so much better off experiencing a pullback or a correction,” Moss says. “A 5, 10 or 15 percent pullback is a great opportunity for investors.” Why? Because no one wants to buy stocks when prices are sky high. That’s why.
If you’re between the ages of 20 to 60, these corrections — which, in this case, was attributed to emerging markets — should have minimal impact on your retirement funds, he says.
First, let’s make sure we know what we’re talking about. The Dow is a price weighted average of stocks from 30 large companies in major U.S. industries. So if stock X is $40 per share and stock Y is $70 per share, a $1 decrease in stock Y may not have as large an impact as a $1 decrease in stock X.
That’s how Cristina Briboneria, a certified financial planner and Bargain Hunter guest blogger, explains it, and she says it is simply one of many indices to help you understand how different markets are doing.
“The biggest mistake people make is comparing their portfolio to the S&P 500 or even to the Dow,” she says. What’s more important is an asset allocation that is in sync with your retirement goals. Then, make sure you use those goals to re-balance your 401k on a quarterly or annual basis, says Briboneria.
Even if recent Dow activity proves a harbinger of a catastrophic event — last week the Dow shot up, then hit a lull — any action you could take carries no guarantees. “You could try to time the market. You could get out and go to cash or buy bonds, but for 99 percent of people, that doesn’t work,” Moss says.
So it is best to worry less and ride out any fluctuations.
“Unless you need cash tomorrow, the daily shouldn’t really affect you,” Briboneria says. “If you do need cash tomorrow, you should have a whole different class of investments.”
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